The king of good times has company — even in bad times. Vijay Mallya-owned Kingfisher Airlines is not alone in hitting a debt wall. Several other companies have seen huge erosion in shareholders’ wealth, courtesy their highly leveraged balance sheet.
An analysis of the BSE 200 list throws up at least nine companies that have debt-equity ratios of over two times and interest cover (their ability to pay interest) less than two-and-a-half times. Top on the list are Aban Offshore, Dish TV, HCC and Shree Renuka Sugars — in that order. The other five are Jaiprakash Associates, Bhushan Steel, Lanco Infratech, GMR Infrastructure and Essar Oil.
While debt levels of these companies are high, the rising trend in interest rates has added to their woes. On top of that, operational pressure (on account of a slowdown in demand) has only made things worse, impacting their earnings.
Questionnaires sent to HCC, Shree Renuka Sugars, Jaiprakash Associates, Aban Offshore and Lanco Infratech on Monday did not elicit response.
The stock market has been unforgiving — the share prices of these companies are down 40 to 93 per cent from their respective peaks. Take, for instance, the case of Aban Offshore. Its debt-equity ratio is the highest among these companies. Though the company has been able to lower its debt from Rs 16,645 crore in 2008-09 to Rs 13,425 crore as of the end of September. At these levels, its debt-equity ratio is still high at 5.28 times. Analysts, however, expect it to drop to 4.7 times in 2011-12, with a bullet payment and improvement in cash flow.
The company’s interest coverage ratio has also slipped and is just a tad above two times, according to results for the September quarter. The rising interest rate scenario and concerns over business fundamentals are not good signs either.
In the September quarter, analysts reduced their earnings estimates for 2012-13 by 7-8 per cent, factoring in lower operating days and recent downward reset in day rates impacting the standalone business.
Another case is that of HCC, the country’s leading construction and infrastructure company that built Mumbai’s prestigious Bandra-Worli Sea link. The company, with Rs 7,150 crore in consolidated revenues in 2010-11, has seen its profit before interest, depreciation and tax (PBIDT) consistently rising since 2001-02. But, rising interest costs have kept its gross profits (PBIDT minus interest costs) range bound (Rs 230-275 crore) in the last four years.
However, things have turned worse in recent quarters. Increase in debt levels (up 20 per cent since March 2011 to Rs 4,171 crore), coupled with high interest costs and repayment of zero coupon FCCB, affected interest cost in the September quarter. Moreover, as a result of the economic slowdown and delays in project execution, its core business performance has also taken a hit.
Thus, for the first time in over a decade, in the latest quarter, HCC’s standalone interest expenses exceeded its PBIDT. Its PBIDT, which has been slipping gradually from Rs 180 crore in the March quarter, stood at Rs 90.7 crore in the September quarter and was not enough to take care of the 60 per cent year-on-year jump in interest costs, at Rs 107.5 crore. The loss at the net level saw HCC’s net worth shrink by Rs 38 crore to Rs 1,424 crore.
| KINGFISHER IS NOT ALONE Nine companies that have debt-equity ratio of over two times and interest coverage under pressure | ||||
| Total debt (Rs crore) | Debt- equity (x) | PBIDTA/ interest # | PBIDTA/ interest ## | |
| Aban Offshore | 13,048 | 6.31 | 2.11 | 2.05 |
| Dish TV* | 1,076 | 4.85 | 2.66 | 2.07 |
| Hind Construction* | 7,382 | 4.52 | 1.46 | 0.84 |
| Sh Renuka Sugar | 8,612 | 4.15 | 1.59 | -1.25 |
| J P Associates* | 44,758 | 3.53 | 2.14 | 1.99 |
| Bhushan Steel* | 16,593 | 2.81 | 3.43 | 2.4 |
| Lanco Infratech | 16,652 | 2.63 | 3.08 | 1.93 |
| GMR Infra | 24,457 | 2.27 | 0.82 | 1.46 |
| Essar Oil* | 14,547 | 2.22 | 2.4 | 0.82 |
| PBIDTA: Profit before interest, tax, depreciation and amortisation Total debt and debt-equity ratio as on Mar ‘11. For Renuka, it is for year ended Sept ‘11; #Based on trailing 12 months to Sept ‘11; ##Based on the quarter ended Sept ‘11; *Stand-alone trailing and quarter financials Source: Capitaline Plus | ||||
Slowing economic growth and delay in infrastructure projects have been a bane for many others. Companies like Lanco Infratech, which were once touted as emerging stars, have been caught on the wrong foot. Apart from operational pressures, their debt levels are also high. “Leveraging is a big issue (for Lanco) and I think that is not going to be resolved anytime soon. In fact, it could go up further, given the lack of internal cash flows and required capex on its ongoing projects and the recently acquired mines in the Australia,” says Arun Kumar Singh of HSBC Securities and Capital Markets. Analysts say, unless there is a sizeable equity dilution, which looks difficult as of now, the company will find the going tough.
The case with Shree Renuka Sugars is even worse. The company, which acquired an integrated sugar player in Brazil in 2009-10 (year ended September), has seen its debt surge nearly 400 per cent to Rs 6,508 crore at the end of 2009-10 over that a year earlier. For the year ended September 2011, it stood higher at Rs 8,612 crore. Thanks to soft sugar prices and a rise in costs, especially sugarcane prices, its operating performance has taken a hit in the quarter. While its consolidated sales were down 5 per cent year-on-year at Rs 2,335 crore, the company reported an operating loss of Rs 241 crore in the September quarter. On the other hand, showing an upward bias, interest costs stood at Rs 192 crore in the quarter (Rs 657 crore for 2010-11).
“Debt is a serious problem for the company. The key monitorable is the Brazil business, which is over 65 per cent of the consolidated revenue. If there is lower cane yield, lower volumes and pressure on realisation next year too, it could create more trouble for the company,” says an analyst with a leading foreign research house who requested anonymity.
It’s not that these companies aren’t doing much and allowing the situation to worsen. While the situation remains challenging for Shree Renuka Sugars, the management is open to divesting its co-gen power business or sell stake in one of its Brazilian facilities.
On the other hand, HCC recently sold a 14.5 per cent stake in its road projects subsidiary for Rs 240 crore, which translates into a total value of Rs 1,655 crore for the subsidiary. Similar moves in other assets could help realise some more cash. Besides, the company recently got conditional environment clearance for its Lavasa subsidiary, which has been incurring losses. Commencement of work should help cut losses, while analysts say an equity placement (or an IPO) could help lower the overall debt. While these are some positives, analysts say, unless HCC’s operational performance improves or debt falls sharply, it could mean continued pressure on its financials.
Companies like GMR Infra and JP Associates seem better off. While GMR Infra, the operator of India’s largest airport (Delhi), has also experienced a sharp rise in interest costs, it has been doing its bit to keep things under control. It sold its investment in InterGen NV in April 2011 for $1.23 billion. However, its debt has risen from Rs 24,457 crore at the end of March to Rs 26,356 crore at the end of September quarter. Its interest costs are also up at Rs 392 crore from Rs 295 crore in the March quarter.
Analysts, however, say that the debt situation is relatively manageable, given that it is at the subsidiary level. GMR has also recently received permission to charge airport development fees from passengers at the Delhi airport. This will lead to an inflow of Rs 600 crore annually.
Similarly, JP Associates, an infrastructure, realty and cement player, is taking steps to cut debt levels. This should provide some support to its stock. “The unlocking of value in the carved out cement subsidiary can be used for de-leveraging the highly indebted financial position. That could provide trigger for the stock,” says Ajit Motwani, analyst, Emkay Global Financial Services. This cement subsidiary, with capacity of about 10 million tonnes (about 30 per cent of JP’s total capacity), at $125 per tonne, is valued at Rs 6,500 crore.
